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UNIT 18 – IFRS 3 BUSINESS COMBINATIONS
• Prior Knowledge – Assumed knowledge
• Outcomes are a very Important part of study guide
LITERATURE
• Group Statements Volume 1 - Sixteenth edition (2015)
• Chapter 2, everything except
• Paragraph 2.8 & 2.11; 2.12; 2.13; 2.14
(Subsequent measurement and
accounting of reacquired rights; contingent
liabilities; indemnification assets and contingent
consideration)
OVERVIEW
Business combination
Purchase assets and liabilities
Example 2.15 pg60
Purchase shares
Example 2.16 pg67
Group Statements
Different percentages of shares can be
purchased. All these possible relationships
will be examined in units to follow
Watch out from whose perspective is the business combination
(seller/acquiree or purchaser.acquirer)
IFRS 3 BUSINESS COMBINATIONS
• Objective of IFRS 3
• How is the objective achieved?
• Scope
• All transactions that meet the
definition of a business combination
• Deals only with the acquisition of one entity by another
Focus of the lecture
IFRS 3 BUSINESS COMBINATIONS
• Business Combination
• Acquirer obtains control
• One or more businesses
• By transferring cash, incurrence of liabilities, issue of equity
interest or contract
• Control
• An investor controls an investee when it is exposed, or has
rights, to variable returns from its involvement with the investee
and has the ability to affect those returns through its power over
the investee
• Business
• An integrated set of activities and assets
• Conducted or managed
• to provide a return
If not a business = Normal
asset acquisition – Refer to
example 2.2 and 2.3 in GS Pg40

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IFRS 3 BUSINESS COMBINATIONS IFRS 3 BUSINESS COMBINATIONS
Where a transaction does not meet the
definition of a business as defined then you
account for it as a normal asset acquisition
journal, no Goodwill/Gain on bargain purchase
IFRS 3 BUSINESS COMBINATIONS
More detail in the next
lecture
ACQUISITIONS
• An acquisition is a
• The accounting treatment of an acquisition:
1. Recognition and measurement of:
• the identifiable assets acquired and liabilities assumed and
• non-controlling interests.
2. Recognition and measurement of:
• goodwill or a gain on bargain purchase,
• at acquisition and subsequent.
Business
combination
Acquirer
obtains
control
over
net assets
and
operations
of acquiree
Exchange
for assets,
liabilities
and equity
ACQUISTION METHOD
All business combinations are accounted for using the acquisition
method.
Steps – Acquisition method
STEP 1:
Identifying the acquirer
STEP 2:
Determine the acquisition date
STEP 3:
Recognise and measure the assets acquired and liabilities
assumed and non-controlling interests of the acquiree
STEP 4:
Recognise and measure the goodwill or gain on bargain purchase.
ACQUISTION METHOD
STEP 1: Identifying the acquirer
• entity that obtains
over acquire
• potential voting rights result in control?
• who is the acquirer?
 Entity transferring the cash or assets
 Entity issuing equity
 Size is significantly greater than the other combining
entities
 Entity that initiated the combination
 New entity formed, one of the combining
 entities that existed before, is the acquirer.

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ACQUISTION METHOD
STEP 2: Determine the acquisition date
• Date acquirer obtains
• Acquirer legally transfers consideration
• Acquires assets and assumes liabilities of acquiree (closing
date)
• Can an acquirer obtain control before the closing date?
• Suspensive legal conditions must be considered.
• What if there are conditions that have to be satisfied before
ownership can transfer?
ACQUISTION METHOD:
EXAMPLES
STEP 2: Identify the acquisition date
EXAMPLES
Polka Ltd acquired 60% of the shares in Dot Ltd and paid the
consideration on 31 June 2015. In terms of an agreement with the
former owners of Dot Ltd, Polka Ltd took control of the business of Dot
Ltd on 31 May 2015. From 31 May 2015 Polka Ltd controlled all the
assets of Dot Ltd and assumed responsibility for all the obligations of
Dot Ltd.
Determine with reasons the acquisition date.
ACQUISTION METHOD
STEP 3: Recognise and measure the assets acquired and
liabilities assumed and non-controlling interests of the acquiree
• Recognition principle
 Recognised separately from goodwill
 Conditions for recognition
Meet the definitions of Assets and
Liabilities
Part of what the acquirer and
acquiree exchanged in the business
combination transaction and not the
result of separate transactions
result in recognising some assets
and liabilities that the acquiree had
previously not recognised
ACQUISTION METHOD
STEP 3: Recognise and measure the assets acquired and
liabilities assumed and non-controlling interests of the acquiree
• Measurement principle
 Acquirer measures the identifiable assets acquired and liabilities
assumed at their
 acquisition-date at fair value
ACQUISTION METHOD
STEP 4: Recognise and measure the goodwill or gain on bargain
purchase
Goodwill = Excess of a) over b)
a) Aggregate of
• Consideration transferred
• Amount of NCI in acquire
• in a business combination achieved in stages, the acquisition-
date fair value of the acquirer’s previously held equity interest in
the acquiree.
b) the net of the acquisition-date amounts of the identifiable assets
acquired and the liabilities assumed measured in accordance with IFRS
3.
ACQUISTION METHOD
The consideration transferred in a business combination shall be
measured at fair value.
Fair Value is the sum of the acquisition-date fair values of:
 the assets transferred by the acquirer;
 the liabilities incurred by the acquirer to former owners of the
acquiree; and
 equity interests issued by the acquirer.

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CLASS EXAMPLES – Next Lecture
1. Purchase assets and liabilities
• Example 2.15 pg 60